What is a personal loan?
A personal loan allows you to borrow money to cover certain costs and pay it back over a set period. The terms can vary quite a bit from lender to lender. For instance, interest rates may be fixed or variable. That said, personal loans are often unsecured, which means you don’t need to put up any kind of collateral to receive them. Generally, however, the loan amounts are lower than a business loan.
A personal loan can typically be used for many purposes, such as consolidating debt into a single, manageable payment, planning to make improvements to your home or covering business expenses.
Personal loan approval is typically based on factors like your income and general creditworthiness.
Pros and cons of using a personal loan
Pros
- Wide array of rates and terms available
- Funds can be used for a variety of purposes
- Doesn’t consider your business’s financials
Cons
- Comes with personal liability
- May have lower borrowing limits compared to business loans
- Missed payments can negatively impact your credit score
What is a business loan?
Business loans can help support small business owners by providing funds specifically for business-related expenses. That may include short-term growth as well as long-term project financing, such as relocation or expansion, and day-to-day expenses.
Business loans are typically separate from personal finances, and the business is responsible for payments. That said, lenders typically require the applicant to provide a personal guarantee. If the business is unable to pay, the applicant would be responsible for those costs, which could impact their finances.
Lenders typically consider your personal credit as well as your business finances when evaluating your application for a business loan. You may, for example, need to provide both personal and business tax returns in your application.
Pros and cons of using a business loan
Pros
- May provide larger loan amounts compared to personal loans
- Can help you build business credit
- Funds must be used for business purposes
Cons
- Generally requires a personal guarantee
- May consider business credit
- May require collateral
Personal loan vs business loan: key differences
Although you may use either a personal loan or a business loan to cover business expenses, there are key differences here that may help you decide between them:
- Ownership of debt: Personal loans are tied to your personal finances and you’re fully responsible for payments, while business loans are tied to your business’s finances (though you may be responsible for payments if the business can’t pay).
- Application requirements: Personal loans generally rely on personal credit, while business loans consider your business credit history and financials. Business loans may impact personal credit if a personal guarantee is required. Business loans typically require you to submit business financial documents, while personal loans don’t.
- Loan amounts and terms: Business loans may have higher maximum loan amounts than personal loans. Terms can vary widely for both loan types, and either option may require collateral in certain circumstances.
- Use of funds: Personal loans may be used for a wide array of costs, while business loans are typically for certain business expenses including for acquiring equipment, machinery, and vehicles. Other business expenses can include renovating your facilities and expanding your business.
When to choose a personal loan for business expenses
If you’re looking for a smaller source of funding or an application process that won’t require business financial documents, a personal loan may make more sense. Remember that you’re personally responsible for those loan payments, and missed payments can negatively impact your credit score.
Citi offers unsecured personal loans to both existing Citi® customers and new Citi customers who meet specific eligibility criteria. If you think you could benefit from a Citi® Personal Loan, apply online today or use pre-qualification to check your eligibility without harming your credit score.
When to choose a business loan
Business loans can be helpful to those who are looking to fund larger expenses, such as expansion through new equipment or day-to-day costs like purchasing supplies. These loans can also help you build business credit, which may allow you to access business products like lines of credit.
Citi offers small business loans with flexible terms and fixed interest rates, subject to credit approval. Applicants must maintain a business checking account with Citi and businesses must be established and operating within the U.S. If you're interested in applying, you may speak with a Citi Business Banker at your local branch or call to speak with a Citi customer service specialist for more details. Citibank Small Business Lending applications are available to new and existing Citi customers through your local Citibank branch. All loan products are subject to credit approval, which will require that the primary operating account of the business be held by Citibank, with authorization to debit for loan payments. Speak with a Citi Business Banker or Citibank Business Specialist at your local branch for more details.
FAQs: Personal loans vs. business loans
Can I use a personal loan for business purposes?
You may have the option to use a personal loan for business purposes, but it depends on the lender. It’s generally best to check with your lender to understand how you may and may not use your personal loan funds.
Does a business loan affect my personal credit?
A business loan may indirectly impact your personal credit if a personal guarantee is required. If the business is unable to pay, you’d be on the hook for those payments, which could impact your finances and credit score.
What’s easier to qualify for: a personal or a business loan?
Given what’s required in the application process, it may be easier to access a personal loan than a business loan. Qualifications, however, can vary for both personal loans and business loans, depending on the lender.
This article is for general educational purposes. It is not intended to provide financial advice. It also is not intended to describe any Citi product or service. You should refer to the terms and conditions financial institutions provide for various products.
